You Don't Have To Be Smart To Be Rich

Remember Jay Zagorsky, surely Weightwatchers favorite social scientist?

A few years ago, the Ohio State researcher came out with a study showing that obese members of the boomer generation tended to have half the net worth possessed by boomers of normal body mass.

Now Zagorsky has explored another aspect of wealth:

Does High IQ = High Net Worth?

His findings: Income rises with IQ, but wealth doesn't seem to. The slightly bright tend to have higher net worths than the geniuses. Perhaps geniuses forget to add to their savings.

Boomers with IQ's slightly above the norm also seem to do better paying off debts than either the impoverished dullards or the very bright. People with an IQ of 115 are least likely to have maxxed out their credit cards.

"The case offers an important lesson: hire a bank or trust firm. "

Corporate fiduciaries get an endorsement in today's Wealth Report post on estate litigation. The Wang fortune, mentioned by JLM here, is touched upon, as is a controversy involving the surviving spouse of diet guru Dr. Robert Atkins. The wife fired the advisors nominated by Atkins in his will, and now she has fired the successors as well. A trust department should have been in charge from the beginning, opines the Journal.

The case offers an important lesson: hire a bank or trust firm. Sure, they can be irresponsible too. But if Dr. Atkins had hired a private bank or trust company to give advice to Veronica - who had little financial experience - she might not have been vulnerable to all manner of advisors and “friends.”

“He's Not Unbiased, He's My Broker!”

Fee-based brokerage accounts protect the broker's clients. Really!

That was the theory, anyway. With an annual income assured, the broker would no longer have an incentive to churn the account in order to generate additional commissions.

The portfolio might be full of cats and dogs, but they wouldn't turn over so often.

But fee-based accounts seem to emphasize the broker's role as adviser rather than handler of transactions. Officially, brokers are presumed to offer only incidental advice. Yet as the survey described here indicates, many clients assume that advice-giving is the broker's primary function.

Would clients feel better if brokers offered unbiased advice, as registered advisers are expected to do?

Yes. According to the survey, more than nine out of ten believe advice-giving brokers and registered advisers should be held to the same standards.

What's more, “90% think a stockbroker should be required to disclose prior to an investor purchasing an investment product (such as a mutual fund) any incentives or other forms of compensation (such as cash payments, vacations, etc.) that the broker is receiving some form of inducement to push the investment product on his or her customers.”

Who is behind on tax payments?

Over 450,000 Federal Workers Are Tax Deadbeats reports the Tax Prof Blog. He lists the top ten agencies with the largest percentage of delinquents. The percentages range from 9.4% of employees at the U.S. Commission on Civil Rights to a low of 1.3% at the Treasury Department.

Could it be that pesky AMT is at fault?

Fair Warning

Worried about the survival skills of your favorite Republican members of congress?

Headed to Washington yourself to lobby for AMT repeal?

Heed this timely warning, issued by Robert Reisch, former Secretary of Labor, on NPR:

In Washington a friend is somebody who stabs you in the front.

How about a 35% AMT rate?

Tax Notes Today ($) reports that in order to exempt taxpayers with AGI under $200,000 from the Alternative Minimum Tax, House Democrats are looking at the possibility of raising the tax rate to 35%. That's the same top rate as for the regular tax, just without the deductions, so I'm mystified as to how that could ever be an "alternative."

The thing that the legislators may have overlooked is that the reform proposal likely hits "blue states" even harder than the existing system. This recent Washington Post article has more on the Democrats' tax thinking.

Collect Those Missing Pension Benefits

Could you (or one of your High Net Worth but careless clients) have forgotten pension benefits waiting to be collected?

Find out by following Jeff Opdyke's tip in the Sunday Journal:

The Pension Benefit Guaranty Corp., the federal unit that backs benefits offered by private-sector pension plans, is holding $133 million in unclaimed pension benefits. The money is for 32,000 people who are owed benefits from pension plans that have been terminated, such as when firms fold.

To search for benefits, check out this Pension Benefit Guaranty Corp. website.

Average unclaimed benefit: almost $5,000. A few people (or their estates) are due much larger sums.

Katrina Tax Break Spurs $11 Billion in Donations

“A tax break that was part of a relief package to aid victims of Hurricane Katrina,” The New York Times reports, “spurred $11 billion in donations to charity . . . more than triple what had been originally projected.”

In 2005 total charitable giving jumped an inflation-adjusted 6% from the preceding year. When figures for last year emerge we'll see whether total giving for 2006 suffered as a result.

Because of the unexpected highly cost of lifting the 50% limit on cash donations in 2005, The Times observes, Congress may be reluctant to give donors other incentives,. If so, hope dims for continuing the provision that allows donors who are at least 70½ years old to transfer up to $100,000 from their individual retirement accounts directly to charities, tax free.

"Blingdexes"

The rich not only have more money than the rest of us, they have markedly difference spending habits as well. To get a handle on the wealthiest segment of the consumer economy, Citibank created in 2005 a "Plutonomy index," composed of stocks of companies that sell to the rich. Today's Wealth Report in the Wall Street Journal reports that other companies are inventing similar indices, including Merrill Lynch, Goldman Sachs and the German stock exchange.

For spectators, the indexes offer a useful new barometer to measure the increasingly separate economy of the rich. And that economy is booming. Most of the luxury indexes have posted an average increase of at least 13% between 2001 and 2006. The Dow Jones Industrial Average, by comparison, has increased an average of 4.7% annually during the same period.

The article also reports that total assets held by the top 1% of Americans has increased by 50% since 1998, to $16.7 trillion in 2004. That is some serious spending power.

However, most spending by the rich is discretionary, so investing in the stocks of companies that cater to the rich may not be a sure thing. Remember the infamous "luxury tax" on yachts, imposed because the rich could so easily afford to pay more? They responded by not buying yachts at all, and the American boat-building industry was crushed. The tax fell on the workers and owners instead of the buyers, and it was one of those taxes with big dynamic effects and no net revenue to the government at all.

Still, as the number of millionaires grows, the consumer economy can be expected to be less homogeneous. There will always be a place for both Tiffany's and Wal-mart.

Who Inherits Nina Wang's Billions?

As this Economist article suggests, the Nina Wang story falls into the “you can't make this stuff up” category.

In an It's All In the Planning post, Quah Seng-Sun writes:

“According to some news reports in Hong Kong,” the world's richest woman “left her entire wealth to her personal feng shui master.”

Till retirement planning do us part

When it comes to retirement planning (and family finances, for that matter) don't expect husbands and wives to always be on the same page.

That useful reminder comes from this Marketwatch article.

Sample insights:

Some couples did not even agree on the basic question of whether they use a financial planner, with the husbands and wives of 22% of the couples responding differently to that question.

* * *

81% of married women said they believe they share financial-planning decisions equally with their spouse, compared with 44% of married men.

* * *

58% of the couples gave different ideas about whom their spouse would turn to for financial guidance in the event of their death.

Multimillionaires: Their Tribe Increases

As of 2006, more than one million U.S. households boasted a net worth (excluding primary residence) of $5 million or more.

Ten years earlier, only 250,000 households had $5 million or more. (But households with “only” $4 milion had more buying power than a $5-million household has today.)

You can get a pdf of the Spectrem study here.

Hedge Funds as Big I.R.A.’s

From a front-page story in The New York Times:

Many Americans squirrel away as much as they can into retirement investment accounts like 401(k)s and I.R.A.’s that allow them to compound their earnings tax free. The accounts also reduce what they owe when tax day rolls around. For the average person, however, the government strictly limits the contributions to about $20,000 a year.

And then there are people who work at hedge funds.

A lot of the hedge fund managers earning the astronomical paychecks making headlines these days are able to postpone paying taxes on much of that income for 10 years or more.

The key to the hedge fund tax boon is that many managers of these lightly regulated private pools of capital have the ability to earn the bulk of their compensation offshore and invest it in their funds, where it grows tax-free.

We're Entering the Terrible Twos!

Doesn't seem like two years ago that Jim Gust started this Weblog. But it is. Some 450 posts have appeared here!

Blog postings are by nature ephemeral. As hopes for estate tax repeal rose and fell, twisted and turned, we told you all about it. Ditto the efforts to at least reform the estate tax, with a reasonable exemption and nontoxic rate. All ancient history now.

A few posts may merit a second look:

“Rich” but in debt. Was anybody really idiotic enough to take out a $5-million interest-only mortgage with negative amortization option? Follow the link to Daniel Gross's article to be reminded of the all-too-recent bad old days.

Trusts for transhumans. Remember the PRT (Personal Revival Trust)?

Who Says Trust Fund Babies Can't Rap?

Brush Up on Shakespeare . . . and See His Last Will!

In the latter 1980s, investors were flipping condos like crazy. The real-estate bubble burst, but around 18 years later they were at it again. Now why does that time span sound familiar? But of course! It's the famous Saros Cycle at work again.

Glamour! Guts! Passion! This is a Business Magazine?

Times are tough for business magazines, especially Fortune, where efforts to broaden coverage to include personal finance and other nonbusiness topics seem not to have helped. An article from the NY Times reports;

[A]d pages for the first three months of this year were down for BusinessWeek (3 percent), Forbes (9 percent) and Fortune (13 percent), compared with the same period a year ago, according to Publishers Information Bureau. Circulation at the big three has been flat or falling for the last few years, according to the Audit Bureau of Circulation.

So what's Conde Nast doing? Launching a new business magazine. Described as the Vanity Fair of business books, Portfolio debuts today.

If you visit Portfolio's web site and have the time, read Tom Wolfe's essay on those strange new billionaires who are taking over Greenwich. Fun reading unless you happen to be a hedge fund manager. (Actually, freebooting, take-no-prisoner hedgers will probably love their portrait.)

An AMT factoid that I did not know

The two most commonly cited reasons for the explosion of AMT taxpayers are (1) the exemption was never indexed to inflation, and (2) the Bush tax cuts lowered the taxes of many families down to and below the AMT cutoff, pushing them to that side of the ledger. But OpinionJournal points out that another key culprit is the boost in the AMT tax rates enacted in 1993.

Democrats raised the AMT tax rate in 1993--to 26% and 28% from a single rate of 24% as part of Bill Clinton's tax increase of 1993. According to the Joint Committee on Taxation, the AMT would have hit "only" 2.6 million Americans next year if not for that tax hike.

In other words, we could get rid of 90% of the AMT taxpayers by the simple expedient of returning to a 24% AMT tax rate! I wouldn't have thought four points could make that much difference. This deserves a serious look.

Give Me Shelter!

Americans have an estimated $1.34 trillion stowed in tax havens, reports The Washington Post.

Big Tax Refund?

If the IRS is giving you heaps of your money back, celebrate by ordering this sweatshirt here. (No, we're not getting a commission.)

Like to check the size of George and Laura Bush's refund? Go here.

The Cheneys did much, much better, as you can see here.

A tip of our Red Sox cap to Don't Mess With Taxes for the links to the returns of the POTUS and VPOTUS.

Rich and Richer (Especially in Greenwich)

Fortune's Almanac of American Wealth seems aimed at a downscale audience. Students, perhaps? Still, it's fun to look through the slide show of wealthy eccentrics and say hi to Hetty Green, meanest billionaire who ever was seen.

Marketers of wealth management services will learn more from Business Week's Guide to Luxury Real Estate.

The rising tide of wealth in the U.S., and the growing concentration of that wealth in relatively few hands, is being reflected in the tiering of the U.S. real estate market. Across the country, there are communities such as Greenwich that were once home to the merely affluent but have been gradually transformed into magnets for the growing class of the super-wealthy. In some of these towns—like Newport Beach in California's sunny Orange County, or Paradise Valley, Ariz.—the golden transformation is recent. Others, like Greenwich and Glen Head, N.Y., have been gilded for years. In each of them, though, the same pattern is occurring: The very rich replace the well-to-do. The very rich, in turn, are displaced by the super-wealthy.

Measured by median home prices, the very ritziest zip code is Greenwich, CT's 06831. Median home value: almost $3 million.

With a population of about 24,000, The Advocate reports, Greenwich has more than 40 bank branches. Plus at least one foreign currency ATM, where the town's many hedge fund managers can withdraw Euros, Pounds, Yen or Mexican Pesos.

The F-word in investing

Fiduciary.

Forbes magazine discusses the debate among financial planners about whether they are willing to accept application of the term to their client relationships. The answer is no, they don't want that term, but they are gingerly approaching the idea of explicitly promising to put the interests of their customers ahead of their own.

We've long touted fiduciary status as a key advantage of our bank and trust company clients. We'll be doubling down on that bet in the future.

Has the AMT reform process begun?

The New York Times reports today that House Democrats are moving toward a permanent fix for the Alternative Minimum Tax. Why? Because they've finally tumbled to the fact that the AMT has by far its biggest impact in the states presently controlled by Democrats!

I sometimes wonder why the Republicans are characterized as the party of the rich when the highest income states—the ones with the most valuable property—are mostly run by Democrats. Per the article, the states with maximum AMT impact include California, New York, Pennsylvania, Connecticut, Massachusetts, New Jersey, Virginia, Minnesota, Wisconsin and Michigan. In these states from 18% to 25% of taxpayers will owe AMT this year, unless Congress acts.

The Democrats' goal is simply stated: exempt those with family income of less that $200,000 from the AMT. The means are a little more difficult to articulate, because under current scoring methods that change would create an enormous revenue shortfall.

Herewith, some outside the box ideas:

1. Come up with a different scoring method.
2. End the deductibility of state and local taxes. This change would leave many more taxapayers paying the normal tax, because that's the deduction most often the trigger for AMT payments. Upside, big revenue gain even as the number of AMT filers falls dramatically. Downside, no one will give Democrats credit for a tax cut (because it won't be one).
3. Repeal the regular income tax, rename the AMT "regular income tax."
4. Offset the lost revenue by starting to tax large pools of capital that are currently tax exempt. I have in mind the endowments of the nonprofits and the interest payments from muni bonds.

None of these are likely. What I expect the Democrats to do is end the 15% tax rate on dividends and long-term capital gains, even though the preferential rates have raised far, far more revenue than projected. Increasing those tax rates will drive down stock prices and reduce realizations, but those factors are outside the scoring rubric.

Gentlemen (and ladies), watch your wallets.

Don't Care to Bump Yourself Off in 2010?

You might duck death tax with trusts instead.

That Violently Assisted Suicide parody that Jim Gust and the Tax Prof called to our attention the other day has reached the mainstream media.

Evidence: this estate-tax story in The Wall Street Journal.

Now that the estate tax seems determined to stick around (and don't bet on that one-year hiatus), the Journal says that tax-reducing trusts are selling like hot cakes:

GRATs, or grantor retained annuity trusts, have boomed as a way to give lucrative assets to family and friends without paying a hefty gift tax. A GRAT allows its owner to discount the taxable value of a gift, and is used to transfer appreciation on hedge funds, private equity, real estate and other assets without paying gift tax.

P.S. I still think that parody misses the mark. For every rich guy who would pay to have himself bumped off in 2010, there must be dozens of impatient heirs willing to shell out for a little homicide.

Segmenting the Wealth Market

Most often marketers divide relatively well-to-do people into three segments, based on investable assets:

Affluent - under $1 million
High Net Worth - $1 million to $30 million
Ultra High Net Worth - $30 million and up

As those with access to the online WSJ can read today, Bank of America prefers an updated three-way split:

Under $3 million
$3 million to $50 million
$50 million and up

Bank of America's bigger numbers probably make sense, considering that nobody makes the Forbes 400 with less than $1 billion.

Today's Journal article and Robert Frank's related blog post concern the snags (not entirely surprising) being encountered as Bank of America prepares to digest its fancy-pantsy new acquisition, U.S. Trust.

Check out the comments to the blog post. Sounds like Bank of America's reputation for one-size-fits-all service hasn't changed since its Nationsbank days.

Kaula Lumpur: a Trust Marketing Dispute Goes to Court!

We've mentioned Quah Seng-Sun's blog before. Here he calls attention to a dispute between two firms that draft wills and trusts.

Did one firm really steal the other's . . . presentation slides?

The Tigers and the Lady: Investment Strategies Compared

Tiger 21 has been called the world's most expensive investment club. (No, I wouldn't pay $25,000 a year to hear sales pitches from hedge fund managers, even with excellent lunches thrown in. But I don't have $10 million, either. Maybe there's a connection).

You can read all about the group in this 2004 Fortune article.

Tiger 21 isn't shy about publicity. Recently the group issued a summary of their approach to asset allocation. Turns out, the Tigers' asset mix is not too far from the allocations Northern Trust identified among investors with $10 million or more. Below is a rough comparison (figures may not add up to 100 percent because of rounding). Just for fun, the asset allocation that Brooke Astor's son created for her is shown alongside.

If a heavy weighting in alternative assets is a measure of boldness, Mrs. Astor's portfolio makes the Tigers look like pussy cats.

So that's why I can't seem to get ahead

The TaxProfBlog has a post about the Tax Foundation's "Tax Freedom Day," when we can stop working for the government and start working for ourselves. My home state of Connecticut has the very last Tax Freedom Day, May 20, which is four days later than New York (May 16). The state formerly known as "Taxachussetts" is in ninth position, with a May 6 date for freedom.

For the nation as a whole, tax freedom is two days later this year than last, April 30. Only eight states have a tax freedom date earlier that this year's federal income tax filing deadline. Oklahoma's is earliest, April 12.

I sure wish I knew where all those Connecticut tax dollars are going.